Different employment of capitals in vertically integrated sectors: Smith after the Austrians

The Austrian notion of stages of production and the related principle of the greater productivity of roundabout methods, plus the neo-Austrian notions of vertical integration and vertical division of labour, are utilized in this paper in an attempt to reconstruct Smith’s convoluted arguments on the different employment of capitals in chapter 5, book 2, of the Wealth of Nations. Smith’s arguments are first clarified in the light of the two concepts of capital (money capital and productive capital), of the two aspects of productive labour (living labour and dead labour) and of the two viewpoints (of an individual and of society) on which Smith’s theory is based. The results of this clarification are then used to prove that, independently of Smith’s own words but in consistency with his theory, the notions of “quantity” and “productivity” of productive labour have a “vertical”, as well as a “horizontal”, dimension so that they fit both the input–output scheme and the Austrian framework of time-consuming methods of production.